Spontaneous deregulation tests regulatory gaps in the digital economy

Just recently, I facilitated a seminar for the Lagos Judiciary at the Lagos Business School with theme Digital Economy and Legal Regulation. The aim of the program was to share insights on the emerging digital economy with their Lordships, and draw attention to the imperative for regulatory evolution in the face of the pervasiveness of online platforms of the kind operated by technology giants such as Facebook, Google, Uber and Airbnb. There is hardly an area of economic and social interaction these days that is left untouched by these platforms in some way.

The Regulatory Gaps

To fill the regulatory gaps in the digital economy, these behemoths have resorted to what could be referred to as spontaneous deregulation. I first encountered this term in an article by Benjamin Edelman and Damien Geradin, and has arisen as a result of digital disruptersignoring laws and regulations that appear to preclude their business model, which is typically based on providing platforms for crowd sourcing and giving rise to the sharing economy. Believing in the efficacy of their utility model and its appeal to a pent up global demand, these disrupters seem to see many rules and regulations as belonging to the past and impractical for today’s innovative clime. They therefore simply ignore them, opting for their own version of self-regulation, usually based on a mutual rating system between service providers and consumers. It is this skirting of existing regulation that is referred to as spontaneous private deregulation.

These disrupters make the rules for themselves as they go along, because in fairness to them, as their platforms reshape markets, the scope of activity subject to regulation tends to decrease, and various forms of protection disappear.These companies operate in interstitial areas of the law because they present new and fundamentally different issues that were not foreseen when the governing statutes and regulations were enacted.
Two major areas in which these digital czars have riled the establishment are in transportation and hospitality; the major ‘culprits’ being UBER and Airbnb. UBER, until recently a relatively unknown company out of Silicon Valley in California employs 160,000 drivers today, and is adding an average of 20,000 drivers every month. This transport servicesdisrupter is now valued at $41b, and operates in many major cities across the globe. Airbnb, a previously obscure company with similar roots and reach, has over 1.5 million accommodation on her platform, and is now valued at $25b.

The need for ‘platform fairness’

Axelle Lemaire, French secretary of state in charge of all things digital, insists that France is open to platform operators, but consumers have to be protected. She is sponsoring a law to be passed by the French Parliament which will create the principle of ‘platform fairness’.Karnataka state in India, where Uber piloted its India service two years ago has directed taxi aggregators such as Uber to stop operations in the state until they secure a licence from the government, triggering sharp reactions from the corporate world.Getting a licence would mean no more surge pricing, complying with the maximum fares fixed by the government periodically and registering with local transport authorities.

The question is why has it taken the Karnataka government such a long time to wake up to regulatory gaps in her transport sector? And how many other cities are in this quagmire?

The U.S Supreme Court recently ended a decade-long battle over Google’s massive book-scanning project, declining to take up an appeal by authors who claimed the company violated copyright law ‘’on an epic scale’’. The justices denied certiorari in Authors Guild v. Google, 15-849, leaving in place a ruling last year by the U.S. Court of Appeals for the Second Circuit that said Google’s project was permissible. The appeals court decision invoked the ‘’fair use’’ doctrine, which permits some ‘’socially beneficial’’ use of published works such as news reporting or research, that would otherwise constitute copyright infringement.

Airbnb has had its fair share of issues with one of her largest markets, New York. A major concern is the legal regime within which Airbnb operates; one that is marked by poorly drafted laws that fail to account for challenges presented by the sharing economy. As explained by Airbnb cofounder Brian Chesky, “There were laws created for businesses, and there were laws for people. What the sharing economy did was create a third category: people as businesses,” to which the application of existing laws is often unclear. These new business models raise complex questions that have not yet been addressed by either legislatures or courts.

Because the threat of enforcement actions can have a chilling effect on start-ups and their users, state and local government officials should consider how their actions may affect burgeoning businesses. Officials should encourage the sharing economy’s growth through collaborative efforts rather than seek to protect incumbent businesses.

Regulation seems too slow in catching up

The slow pace of regulation evolution seems to strongly suggest that the legal profession itself is ripe for a technology revolution that will optimise the largely manual and laborious process of enacting laws and regulation in the face of the aggressive pace of digital innovation.

I recall the indignation of their Lordships when I cautioned that the learned profession could be more vulnerable than they think when it comes to disruption, and that emerging technologies like cognitive computing and other forms of machine learning can help narrow the gap between regulation and innovation.

Much as it may sound improbable, given its intrinsic consultative nature, I was not surprised when I came across an article on the World Economic Forum’s collaborative platform, announcing that a Law firm Baker & Hostetler has done just that!

Okere is the Founder of CWG Plc, the largest Systems Integration Company in Sub-Saharan Africa & Entrepreneur in Residence at CBS, New York. Austin also and serves on the World Economic Forum Business Council on Innovation and Intrapreneurship.